In a time of market volatility like the present, dividend stocks may provide a margin of safety. Investors can have confidence that many dividend-paying companies will have the wherewithal to continue returning cash to them and in some cases will regularly raise the dividend.
So it’s no wonder that for the year to date through Feb. 7, the S&P 500 High Yield Dividend Index, which includes the S&P 500’s 80 top dividend payers, returned 2.6% including dividends, creaming the 5.8% negative total return for the overall S&P 500, according to The Wall Street Journal.
As for investment possibilities, here are four of investment-research firm Morningstar’s medalist-rated dividend exchange-traded funds. The medalist funds earn gold, silver or bronze ratings, just like the Olympics.
Vanguard Dividend Appreciation ETF (VIG) is rated gold. The fund “focuses on quality franchises that have reliably increased the amount of cash they give back to shareholders over time,” Morningstar analyst Lan Anh Tran wrote in a commentary.
Vanguard Dividend Appreciation’s “stringent selection criteria yield a portfolio that balances income, capital appreciation, and risk,” she said.
“Thanks to [its] quality focus, a greater percentage of the portfolio is invested in stocks with a positive Morningstar economic moat rating than the Russell 1000 Index. This dials down risk and will give the fund an edge in rocky markets.”
The fund has a 12-month yield of 1.64%, according to Morningstar. The 12-month yield measures the sum of a stock’s trailing 12-month dividend payments divided by the last month’s ending share price plus any capital gains distributed during the period.
T. Rowe Price Equity Income ETF (TEQI) is rated silver. The fund’s “pedigreed team skillfully executes a balanced approach to equity income investing,” Morningstar analyst Linda Abu Mushrefova wrote in a commentary.
“The team applies a well-rounded approach to equity income investing that emphasizes yield, valuation, and fundamentals. [Fund manager John] Linehan looks for attractively valued dividend-payers with solid balance sheets.”
Further, “Bottom-up stock selection determines positioning in this portfolio,” Mushrefova said. “While yield is the main focus here, Linehan pays attention to each stock’s fundamentals and relative valuation characteristics, too.”
The fund has a 12-month yield of 1.62%.
SPDR Russell 1000 Yield Focus ETF (ONEY) is rated silver. The fund’s “low fee and pointed exposure to the value, quality, and small-size factors should help it compensate investors for the risk that comes with prioritizing higher-yielding stocks,” Morningstar analyst Ryan Jackson wrote in a commentary.
The fund’s managers “adjust stocks’ weights to favor those with high dividend yields, attractive valuations, strong quality traits, and smaller market capitalizations,” he said. “The value, quality, and small-size factors have historically been tied to market-beating returns, so their inclusion in portfolio construction should aid performance.”
But keep in mind that yield is the primary focus. “It is weighted twice as heavily as the other factors,” Jackson said. “This can invite risk…. Incorporating the quality factor should help dial down this risk. It won’t weed out all the risky dividend payers, but it shields the fund from some fundamentally-weak stocks.”
The fund has 12-month yield of 2.5%.
WisdomTree US LargeCap Dividend ETF (DLN). The index this fund tracks “weights stocks by projected cash dividends to be paid over the next year,” Jackson wrote in a commentary.
“Those with the best combined quality and momentum characteristics see their weight adjusted upward by 50%. This dividend-weighting approach places fundamentals front and center.”
The fund has outperformed the Russell 1000 Value Index by a wide margin over the past five years. “Profiling stocks based on profitability should aid performance; the quality factor has been historically been tied to market-beating returns,” Jackson said.
The fund has a 12-month yield of 2.01%.
